Sunday, December 28, 2014

With the current give and take on ZIRP and SP500 at record level and DOW breaching 18,000, and quasi-millennialist concepts like "Secular Stagnation" or "New Normal" - thought it would be useful to look at the long term view. The following shows not much has changed for the USA in terms of likely growth. The impact of demographics on the USA may have certain immediate tactical importance - for example as the Great Recession led to early retirement for "Boomers" or for certain sub groups like Hispanic women. ( Hotchkiss, Atlanta Fed "Adjusted Employment to Population Ratio As An Indicator of Labor Market Strength" ) but in the end demographics is not a independent or causal variable but is dependent and acts as an identity in being a main attribute to growth. So too with productivity, the other attribute to US growth, which will wax and wane not because of any stagnation or boom, but in terms of the expected duration of the users/creators of the changed productivity. Productivity in the long run is a dependent and an identity, as is demographics/population. Inflation is the third attribute to nominal growth, and it is also a dependent and also acts as an identity. The independent variable for US nominal growth, or NGDP, is the amount of profit that can be produced given the current US setting. And if population, productivity and inflation are dependents, then the amount of profit that can be produced is a optimization problem given the current legal and security setting of US corporates. During some phases inflation is stressed and at other times population - and so on. And that legal setting is the US Constitution and the US "rule of law" applied to US corporations. The USA, since it entered the globalized world in being the deciding force for WWI and thereby the lead at the peace conference, creates the mix of inflation, productivity and population required to maximize profit, given the main challenge to the US Constitution and thereby maintaining the capitalist liberal democracy system.

Therefore, it is the security of the USA which will define in the end profit realized and potential - or more simply put it is war which defines the USA profit attributes and growth. And thereby it is war which define the NGDP of the USA and how the three main factors of NGDP are weighted in terms of population, productivity and inflation.

Examining how these basic factors to USA NGDP have developed over the last century, 4 distinct long phases can be identified. The story of US growth for the last century, and subsequent SP500 levels, has been the common denominators with each of these 4 phases. The business cycle, where most begin and end any analysis of growth and markets, is merely an overlay to these phases. Even a casual memory shows that the phases are based upon war.

1. The German War 1914 to 1946
2. Cold War I 1947 to 1967
3. Cold War II 1968 to 1988
4. US Ascendancy 1989 to 2014

Within these 4 phases the breakdown of contribution to NGDP from population, productivity and inflation is somewhat consistent considering the huge differences and challenges unique to each phase, but that uniqueness does effect the weights of each factor. The ability to maximize profits through optimizing the three factors does vary on nominal terms, especially as large changes in inflation are required in a certain phase to maximize nominal profit - but real GDP is, over the long run, a very steady 3% plus growth. It is this ability to maintain a consistent business setting which allows the US to optimize the three factors that has made the USA the behemoth power that it is today.

The factors weights of NGDP growth, the contribution weights, are population adding about 20%, productivity about 36% and inflation the rest of about 48%. While the business cycles overlaid onto these phases are complex and each cycle unique - from the super cycles of the Great Depression and the Great Recession to the minor business cycles that play out every 4 to 10 years - each phase can be identified and framed by the national conflict or war that was central for that specific phase. Even the latest phase - US Ascendancy - is defined by the issue of insurgency to the US cultural and economic hegemony.

The USA economy is a war economy.

It is the nature of the war prevailing that will define the economy and the nature of the growth the USA experiences.

When the phase war is not one of attrition but one of conquest and domination, US productivity surges as the duration of forward expectations can extend making investment to produce such productivity less risky, but when the phase war is one of attrition, as it was in phase Cold War II, from the worst of Viet Nam morass to the final caving of the USSR in 1989, productivity is almost halved as the duration for forward expectations is halved as risk increases. Anyone born prior to 1960 can remember as a young child being woken at night by a siren and always wondering if this was the night the Russians attacked and nuclear war commenced. When the USA entered the post USSR phase of hegemony, the Ascendancy phase - despite the popular generally gloomy economic and political narrative that has almost been constant in this phase - productivity and population doubled from the attrition of the Cold War II phase as risk to forward expectations dramatically declined. And despite the terror of 9/11 and the so called "failed" wars of Afghanistan and Iraq, few Americans than ever as a percent of the populace saw war, and the world became undeniably safer and safer as insurgency against the American hegemony was dealt with.

While NGDP varies, real GDP is stable around 3.2% for the last century. Inflation is the "buffer" , a sector identity such that the results are a steady, or optimization of nominal corporate profits so that real GDP is kept steady.

The above is the basic axioms of Minsky-Keynes depiction of the US economy. All other powers that have been authoritarian based, or corporatists (fascism), socialist or communists, and that have come to depend upon a globalized economy then have had no choice but to attack the USA for they are quickly put into a zero sum world where either the US system or their system prevails. That results in war, and is why the USA has been defined by war, or the USA capitalist liberal democratic system with profit maximization at its core, is always being tested or challenged even to the point of possible destruction. That in this warrior nation state, the drive to maximize capitalist profit (which are more often than not the opposite to rentiers profits) prevail and is our defining characteristic - not a "people" or religion or geographic area.

The USA is a capitalist liberal democracy, and this defining characteristics has been the cause of all the wars for the last century, as state corporatism of the Germans, and then the Marxist-Stalinist socialism of the USSR, realized that they were in a struggle to the death with the USA as their forms of government were mutually incompatible with the USA capitalist liberal democracy and they would cease to exist unless the USA was eliminated or changed to a different system.

The Table:

The current ratio of the growth of SP500 to NGDP is at the highs for the last century. That the average ratio has been where the SP500 growth is 1/3 of the NGDP. Why this change? When the war threatens the survival of the USA, SP500 lags terribly, and in addition to this risk if the war is one of attrition, as it was in the dark second phase of the Cold War, most of NGDP growth, and thereby to make the required nominal capitalistic profit, is provided by inflation. Now that has been reversed, matching the perhaps hubris of the USA immediately after Hiroshima and the smashing of the German corporatism model.

Yellen and company have it all wrong, as long as the USA is empowered for war, able to fight war such that it is reasonable to see the USA prevail, inflation is not something that can be generated nor really curtailed, but is rather an identity responding to the USA security policy. The Fed can only be an administrator and make the best of the phase war for the period,and can only focus upon inflation in the end. And by focusing on inflation the Fed can only seek to have the necessary changes inflation move discreetly. This is the purpose and the theory behind the Taylor Rule, to allow feedback such the Fed can make the necessary identity moves in inflation as effective as possible. In the end the Fed cannot curtail or encourage the inflation rate that will occur. The Federal Reserve is always, in the end, an administrator and every attempt at "policy" will only delay or unnecessarily speed up the monetary status that will occur. For in the end inflation is an identity, not a causal variable.

Population is also created or will be whatever is required, in the end, to maximize nominal capitalist profit. Whoever unlike any other form of government, with the liberal democracy such population results can only in the end be a good. The Malthusian concerns of "global warming" types or just about any demographic concern is something that will have nothing to do with any reasonable foreseeable economic time period. Malthusian and Millennialistic concerns should be seen for what they are - religiosity that is no longer fulfilled with traditional religion. If concepts like global warming - and I have no interest debating it here - are valid and are science, then they will simply be priced into profits as any cost and thereby be solved with the relentless pursuit of capitalist profit. Such is the power and beauty of a liberal democracy. This also means that all consideration of NGDP based upon demographics - all the ad nauseum of late on Boomers and their spawn is trite. What will be the demographics in the USA? I can answer with confidence and total predictive capability - it will be whatever maximizes capitalist profits. To me that means that there will be a relative resounding boom in immigration and perhaps the Mils will have more kids than one thinks at this point.

The other major attribute for growth, that contributes almost 1/2 of growth is productivity. That seems to be on track at the usual .45 weight.

Going forward the table in context of the true nature of the warrior America economy suggests that the current FOMC is assuming more power than it really has, that it will in the end only "shepherd" the inflation required and that all "extraordinary" measures will cease - likely not really required nor as important as all consider for a couple of years now.

He goes on about how Germans just seem completely out to lunch on the most basic economic canon. That what are accepted ideas of Keynes and Friedman, by both right and left, the German leadership and economic academia are strangely oblivious or ignorant about - even with the proximity to Austria.

He recaps "ordoliberalism", a supposedly unique economic theory to Germany based upon the terrible toll the chaos and economic disruption of the 1920s and 1930s caused to Germany, providing a German wise knowledge of the reality of how all economic policy not based on balanced budget and careful stewardship of the currency value will lead to chaos and upheaval.

"The Germans have a name for their unique economic framework: odorliberalism. Its origins are perfectly legitimate – a response of Germany’s liberal elites to the breakdown of liberal democracy in 1933. It was born out of the observation that unfettered liberal systems are inherently unstable, and require rules and government intervention to sustain themselves. The job of the government was not to correct market failures but to set and enforce rules."This is rubbish. The German's themselves do not believe this and likely they are amazed the rest of the EZ and OECD is taking this hog-swill seriously.Munchau does get the history right though, in terms of when this "odorliberalism" first appeared and when it gained ascendancy in the German economic policy formulation. And to note this history and to consider the markers and timing gives important insight into Germany today, the state of the EZ, and what is to be done going forward.It is my belief that "odorliberalism" is a deliberate recidivist policy by the German power to return to the bad old days of perceiving a need to dominate Europe, to seek expansionary room, only this time not agrarian "lebensraum" but now "econsraum" to where peace can be maintained with the German people, especially the working class by finding markets for their extra productivity and finance the state programs that allow the state to subsidize wages in the form of percs and employment stability. That this "econsraum" is required so as to have the German worker accept low rather homogeneous wage levels yet maintain productivity and to not concern themselves with the good fortune of the state centric capitalistsand financiers. A "grand bargain", if you will. That this was especially critical when the unification of Germany seemed likely as such across the board deal was required to absorb the near shattered E. German volk. So goes the laudable start to national application of "odorliberalism".Munchau provides the odorsliberalism history, starting first immediately after WWII and coming from the still relatively intact Bundesbank and the mainstay of the German "center right" - it was the policy of the rentiers and national state capitalists still formed in national capitalists collectives with a troika of banking, insurance and industry grouping. Competition was not the issue, the issue was to, always with patriotic fervor, to revive the German economy. To pull Germany our of the ashes, that at all costs order and a state collective policy between capital and workers was required. That the chaos rooted in the liberalism of the the 1930s was what allowed the madman Hitler - who no one knew what he was about until after the war - to gain control. This is of course nonsense. As Keynes sketched out effortlessly in "Consequences" written in 1919, it was not the liberal ideals that delivered Germany to Hitler, but the crazed effort for the victors of WW I to extract revenge and then homage from Germany in the form of monstrous repatriations and severe curtailment of all heavy industry - especially coal and steel. That "odorliberalism" was not a response to this liberalism danger but in fact to continue with the national socialism agenda of the coalition between state, labor and industrialist collectives - or "corporatism". That after the end of WW II, the only group of volks still left who provided the world with WW II were ensconced in the Bundesbank, and while the winners went after the more obvious war capability of Krupp, Messerschmidt, Bayer, IG Farben, and others - all those who sponsored and dealt with Speer - they left pretty well alone the financial arm of the German war machine, especially the Bundesbank. Most of the "bad" industrialist also survived WW II pretty well intact and Speer was not hung by piano wire, only jailed. The occupiers, facing the now aggressive USSR quickly returned Germany to almost the same industrial and financial structure it had before and during WW II.Odorliberalism was the "banner" and is fascism - or "national socialism. Full stop.The brilliant "good Germans" like Adenauer immediately countered the "odorliberalism" fascists by working closely with the Frenchman Jean Monnet and with, at that time USA support, used the Monnet Plan framing to dispense Marshall Plan funds and start the plan's execution with the various industry and defense and monetary groups that were the early precursors to the EZ, with the European Coal and Steal - the European Coal and Steel which effectively kept the Ruhr power base from the "odorliberalism" folks. This followed with the long line of basically CDU, Adenaur's party, controlling the German economy and occasion swings to the left. Keynes was well understood and the economic savior of Germany was to be integration and cooperation and eventually the "United States of Europe". Then the big problem was not Germany but French exceptionalism in the form of Gaullism, and UK nostalgia for when they could enter a room without the Yanks and matter. But with liberal French and UK support, and just common sense that "odorliberalism" was all fine and allowed, placated with nonsense about the DM, the Monnet Plan financed by the Marshall Plan was the way to go to lift Europe out of the ruins created by Germany, with many of the German war leadership still ensconced and position of power in the leading industrial executive offices, banking and insurance. Especially in the Bundesbank. This led to where Kohl and Mitterrand joined hands at Verdun in 1984 and swore eternal fidelity of both countries to Europe and to each other - the hand holding was unscripted and moment of greatness for them both.

and culminated in 1991 both proposing a corps strength W European army that would coordinate with NATO, perhaps even be a member of NATO, but be another important institutional marker on the way to the "United States of Europe". That phrase, "the United States of Europe" were oft mentioned by Kohl and Mitterrand and the Socialist and CDU of Germany. Kohl, as late as only a few years ago, felt the USE was necessary to allow the full integration of a post-reunified Germany. Mitterrand felt this was the route so as to maintain French relevancy, to contain Germany and to offset the USA.

But at the same time Germany reunification occurred, the "odorliberal" croud in Germany surged ahead and it was "odorliberalism", nicely cleansed to talk about the pragmatic costs of absorbing the bankrupt East Germany and to address how Germany had become the "sick man of Europe". This was the primary platform of Schroder.

All changed.

At the same time France, often to do with bizarre levels of corruption, went through chaotic change of government and the revival of the anti-USE Gaullist party.

As Schroder embraced "odorliberalism", he found a willing Gaullist party to team with. And also Schroeder found the German center of balance had swung several hundred miles East and the primary concern was not the USA, in anycase, but now Russia. There is also something strange of this focus on Russia, often the more important factor for foreign and international economic policy for Germany than the USA, so strange that Schroeder retires as a director in the inner sanctum of Putin's power base - Gazprom - and then even though the party of Kohl comes back with his so called protege Merkel, Merkel is never to say "United States of Europe" and is in more frequent contact with Putin than the USA or France. This eventually ruptured her relationship to Kohl to the point the great man

of Europe talks about what a naive barbarian Merkel is, in a book he authored forthcoming. He has, for history sake, disowned Merkel and finds her a traitor to the great German European dreams and she has adopted the Russian centric and "odorliberalism" of Schroeder. I strongly suspect that the impact of powerful legacy Stasi files now in Putin's hands transfixes Merkel and limits her ability to carry on the USE dream, she is compromised and has been co-opted by the neo-fascist of Germany.

Further more, Schroeder, using "odorliberalism", and carrying on with the shrewd conversion rate Kohl was able to secure for the Ostmark, or DDM to the the DM of basic use of 1:1 and then a still very rich 2:1 for substantial savings of blocks and then 3:1 for speculators. This dramatically cheapened the DM post 1990 as was considered a massive "give-away" to the East German people by the West Germans. But it was incredibly shrewd if Kohl had the Euro in mind. By cheapening the DM prior to the Euro, and than maintaining that relative cheapness, Germany entered the Euro at levels, 1.955 DM per EUR, bizarre in terms of any sort of comparison to productivity or purchasing power parity to the the rest of the to be EZ countries. The DM should entered the EUR at a much richer level, say 1.2 or 1.3. However the justification of the incredible rich conversion of the Ostmark to reunify Germany, and the large turmoil of the other reserve currencies in the 90s after the re-unification - such as Soros "raid" on Sterling - all masked this entering into the EUR at such a favorable term pretty well unnoticed.

It is interesting to note that the ideals of odorliberalism were ignored by all in reunification with East Germany, but then again that was under Kohl's watch. Schroeder, as soon as the DM absorbed the DDM, quickly made odorliberalism his platform for all things EZ, such as the ways and means of the ECB, the making of transfer payments taboo, and the insistence or at least taking the high grand in balanced budgets or parsimonious response to any stress in terms of deficit spending. This odorliberalism now not only swing control to the national capitalist-workers alliance of old, but also was used as a cudgel to coral the rest of the EZ to respond with maximum efficiency for Germany to the very cheap DM entry to the EUR.

And, it worked incredibly well, in the end hamstringing the peperipherals not allowing any remedy to imbalances but reduction in employment. And whenever either a federalist answer, reverting to the Monnet-Kohl-Mitterrand United States of Europe, with the ability of federalism to remedy gross imbalances by ways others than massive unemployment, or whenever the stressed economies try to seek remedy through fiscal deficits and spending, Germay howls the "odorliberalism" rant, now not just a German device to secure power for the corporatist elite via a pact of labor to industry, but "the way" that all of the EZ should adopt.

In short, Germany has moved from the greatness of Kohl's federal Europe to the neo-fascist economics, now called a much less frightful odorliberlism of Merkel.

So this is where I find a person as smart as Munchau disingenuous, perhaps. Maybe he is such an arrogant man that he thinks the lack of understanding Keynes and Friedman in Germany must mean they are crazily naive and ingorant. That they never ever even cracked open Keynes. That is of course nonsense. If there is one trait Germany has shown ever since Bismarck organized the modern state of Germany in 1871, it the ability of the elite in all forms, labor, industry, finance, and academia to conspire. To figure out a master plan for the master volk and then stick to it. That Germany should lead.

The USA is complicit in this Fourth Reich. As the EZ crisis blew out, various Washington DC agencies reached out to find out what was the problem, what was the reason of the crisis. It became apparent that the reason was Germany using the absence of EZ democracy in the strait jacket of a no-transfer remedy confederacy. The highest in the USA understand this and know well the role Germany is taking, their dominant powerful position in Europe, completely at odds of even a few years ago as professed by Kohl. That a 180 had taken place from the spirit of Adenauer back to the spirit of Hitler or Napoleon - take your pick. Bismarck always was clear that hegemon of all of Europe and econsraum was not for Germany. Hitler of course changed that, citing the national glory ("will") that is central to fascism. But the USA also realized that despite the shift to Putin, the USA controlled the area in the end, for Germany could proceed as it was with odorliberalism imposed upon all the EZ as long as Germany did not have to pay for security, the Euro Corp Kohl and Mitterrand envisioned, correctly, as required for the United States of Europe. And the USA realized that if the United States of Europe did form, it would have such a Euro Corp, that the USA must leave Europe, that the EZ crisis would vanish and a powerful state every bit the equal to the United States would appear. This country as a democracy would be a blessing for the USA, but what if old bad ways emerged of Napoleonic or Hitler type? So instead of calling Germany down from odious odorliberalism and their rape number II of Europe, the United States instead went great lengths to understand when do the unemployed youth of Spain, Portugal, Italy and Greece start civil war and insurrection. The results decided upon are not yet reached, so as to prevent the United States of Europe forming, odorliberalism is allowed to carry on an pummel Europe.

This ability to dominate Europe for the sake of provincial German interests was of course suppose to have been dashed with WW II. But Germany to my mind is showing it still is morally corrupt by selfishly and blindly and conveniently embracing ideology that suits German hegemony over all of Europe. Odorliberalism is simply this century's version of the current tract. Folks like Munchau are either innocently naive or complicit in this still obvious national characteristic of Germany. Germany must be curtailed and returned to the peace settlement of WW II, the Monnet Plan and in short order, the creation if the United States of Europe.

As usual brilliant, and you are frighteningly alone showing your academic courage. But I have some thoughts which I hope are additive.

It should be understood that it is not just that there is a curious Dornbush "suddenness" that resolves imbalances, but if those imbalances were built as policy, especially policy that at its heart is meant to provide societal control, increase government power or repair a perceived deficiency in power or alleviate a risk to power (Tienanmen) , or to counter a foreign security risk, the imbalances created by policy can only be resolved by "un-policy". In other words via catastrophe and jumps which will be weeks in the process versus the decades that the policy required to build those imbalances. Since imbalances created are the results of policy, it means by definition they have the current group in power committed "all in" on those imbalances. China may actually be able to remedy the imbalances by a change in policy based on Confucius ideals of the greater good -but that has never been accomplished in history be it the Athenian mercantilism to Roman wheat trade with Egypt to American housing market. So the odds as defined by history is that China will experience a very severe cataclysm ,right up there with a Yihetuan or Taiping event. I hope not, as that would result in war.

That is what is unsaid - maybe it has to be unsaid - that such imbalances are not just severe economic conundrums lacking sensible policy - but are always the cause of all war. These imbalances, therefore, are the most important foreign policy and security issue for the USA and all world governments. If they are successfully deflected from the international lines of transmission - for example the USA "ate" the first phase of the China imbalance resolution via the solvency event of 2008 - they will always cause at best intense internal insurrection or a civil war and at worst global war. Very serious stuff indeed.

These imbalances are intolerable for this globalized world.

Your ideas on Saravelos "Euroglut" are thoughtful. And Saravelos is thoughtful to approach Europe on an international identity perspective like the good Minskian I am sure he must be. But that glut does not exist in truth. The real imbalance is not that that Germany and a few Nord fellow travelers have excess savings and low demand, but that all of those savings are matched and then some by the deficit in the PIIGS. The T2 accounting has become ubiquitous such that it no longer terrifies or even really acknowledged . And the Nord EZ feel they have successfully forced the PIIGS into a long term acquiescence of the policy that built the T2 imbalances, and they will remedy those imbalances via labor. Thus the 50% youth unemployment in Greece today, near matched in Spain and Portugal. And with Italy starting to follow. This remedy though is a fiction, a Potemkin policy which is providing the illusion that the Nord have the ability to consider exporting their excess savings and deflation to the USA. What will happen is all those savings will be marked down so the entire EZ will net to levels the T2 net would now indicate (and then of course the "shadow" netting added as well) so that all that Euroglut goes "poof". Of course the last time Europe had this process WW II occurred, and it is telling that you went to Keynes "Consequences of the Peace". The only constructive answer that can work for Europe is that the T2 and other shadow imbalances are netted across Europe via transfer payments both spot and forward via trans-Europe unemployment insurance like payments and social security and health coverage. There is the small issue of a constitutional apparatus being built to administer this. So I do not think the "Euroglut" is of any risk to the USA.

What I do know is that the highest levels foreign policy formulation in the USA from the beginning of the Euro crisis were well aware of all I say above and anticipated the current status. I heard such discussion first hand. The USA policy formulated for the EZ crisis from 2011 on was to give Germany a "green light" to force PIIGS to use labor to maintain and work to remedy the EZ imbalances. That very capable US analysis calculated thresh hold levels of unemployment in the PIIGS that they feel could be maintained before insurrection and the return of fascism. That Fed Reserve support of the regional central banks along with one off ad hoc measures like the IMF "troika" would also assist in maintaining German hegemony of Europe. France would be bought off by calling this a Gaullist European solution. This was sought by the USA policy authors because of the obvious logic that the only possible competitor to United States hard power would be a Monnet Plan "United States of Europe". So the USA is supporting the German hegemony at the terrible cost of strapping the PIIGS, thereby keeping Europe in one vast chronic "frozen" economic crisis. The USA has no interest in seeing a land and naval force develop that would equal the US military. And a United States of Europe would have a land and sea force the complete equal to the United States.

Lastly you are wrong (said with respect), There is one economist who clearly anticipated both the USSR demise as well as the Japanese crash. Whats more she correctly predicted the "lost decade(s)" of Japan that followed the 89 crash. I am not certain that she was aware of this (but I would imagine this autodidact economist must have read Minsk), but she used a very clean application of Minskian like identities to global imbalances to reach insight. Whats more she freed herself from the national account data and considered the world as populated by large city-state economic regions and where the imbalances reside. For example she would focus on imbalances between Honshu and Tokyo and much as Japan to the United States. That person was of course the great Jane Jacobs. Just as you went back to "Consequences", a read now of "City and the Wealth of Nations" is a good use of time.

Saturday, October 18, 2014

If UER-6 and household survey unemployment rate (now at 5.9%) showed labor slack, a parallel status would be found in the insured unemployment data. Or the the ratio of insured labor force to total labor force would have changed significantly, dropping in similar fashion as the labor force participation rate.

But data clearly shows that the ratio of insured labor force to total labor force has been unusually steady, ever since the large influx of women entered the work force in the 1970s onward. The ratio of insured labor force to labor force does drop similar to the labor force participation rate drop, during the 2008 to 2009 business slowdown, but has corrected swiftly while the labor force participation rate has stayed unchanged.

The ratio of insured labor force to labor force has returned to levels experienced throughout the decade prior to the solvency event of 08.

The weekly initial claims and continuing claims data is accurate and timely. It is not a derived level or rate from a sample as it is comprehensive. But for the ARIMA seasonal adjustments, the insured claims is consistent and accurate and factual. It is what it is. The BLS and CES uses the state data to calibrate and revise the household survey which by definition is a sample, and the establishment business survey that derives payroll. The household and establishment data can only be accurately portrayed with little margin of error every 10 years with the census - but even then that window of accuracy comes as hindsight after the census data is ordered and cleaned. So BLS and CES depend on the above stable ratio to calibrate and revise the household and establishment data using the timely and comprehensive claims data. At least they have done so for the 40 years prior to 2008. But in this solvency event with both the slowdown and then the recovery, BLS and CES have not applied the claims data with the same rigor they have in the past. If they had done so, using the 80% to 85% insured to total labor force ratio, the unemployment rate would have experienced much higher rates at the economic nadir and then much lower rates as we recovered. It is obvious that given the insured labor force to labor force ratio relative stability, the household data is now in error and will have upward revision of approximately 1 million employed.

That would change the current 5.9% unemployment rate to 5.1% unemployment rate raising the labor force participation rate accordingly and eliminating the unusual spread between UER-6 and UER-3.

Here I take the weekly complete census of insured unemployment rate and divide continuing claims by that rate to end with a derived household unemployment rate using insured unemployment and the stability of the ratio of the subset insured labor force to labor force.

The last data point for both - August 2014 - is provided. The growing error in the household data by calibrating to the weekly claims census is obvious. It also shows the error is approximately .8 % in the unemployment rate or approximately 1 million employed.

The magnitude of this error is shown in the Beveridge Curve for insured unemployment and for household unemployment.

This shows the insured data coordinates to other impressions of the recovery like retail sales, consumer lending, durable goods and especially autos; while the household unemployment data is out of synch with other economic data, including the JOBS data.

Detailed and complex contortions explaining why the household survey is accurate are more and more frequent, but none of these discussions even bother to explain the census based claims data - since it cannot be done - it is simply dismissed or there is some sort of bizarro world parallel universe explanations that claims data only reflects the rate of layoffs. That of course makes no sense when one considers the continuing claims data which drops only as employment picks up.

So the insured data Beveridge Curve is the accurate and complete depiction of the nations employment status.

The reality is the employment levels are showing a near record if not record robust strength that can only occur with a consistent 4% real GDP. The unemployment rate when it is finally revised to the correct level will show that the current unemployment rate is about 5 1/8%.

This means that the FOMC is in the midst of one of the most significant policy errors in the history of the Federal Reserve since 1913. That the whole premise of "forward guidance" is in error as the inflation rate is not related to the output gap, and then the output gap now being used is in error as right now there is no labor slack left and, unless a new internet like technology flows into the economy as it did in the 1990s, heightening productivity, significant inflation given all the capacity being used will certainly occur.

But why is there no inflation now given a correct read of an extremely tight labor market? Where are the wage pressures that theory says should exist now.

That is easily explained pragmatically with obvious cause. The 2008 solvency event hitting the "consumer of last resort" USA market made the USA specific event a global event. That has created the illusion there is this Rogoff Reinhart "global economy" when there is not. There is the massive hegemon USA economy and then the rest.

As the other sovereign economic units respond to the USA solvency crisis, almost all have resorted to a mercantalistic currency policy. Abenomics, China and now Germany via the Euro reversed the trade weighted decline of the dollar to a consistent 2 1/2% per annum enriching of the dollar on a trade weighted basis. One can see when the dollar has a period of unchanged values then CPI then surges, as we saw in the the 2nd Q 2014. The lack of inflation is solely dollar level caused and explains about 130% of the inflation that would have occurred now given the lack of capacity in the US economy. If the FOMC persists in this gross misread of the current status - and perhaps Fischer does realize that as shown by his recent focus on exchange rates - and seeing that the dollar level has always been an administered rate, established by the US hegemon after considering security needs first then domestic needs second, the dollar will cheapen as it usually does, suddenly, after some keystone forum as the USA asserts their power. Then a calm to cheapening dollar will expose the reality of the tight labor market and little capacity of the US economy. A large surge in inflation will occur to levels that may approach 6%. That is if the Fed carries on with ZIRP.

The BLS, and the CES - who does the heavy lifting and revisions for the BLS - very clearly go over the source of error in the household data and how it is repaired/revised by claims data:

"On an annual basis, the establishment survey incorporates a benchmark revision that re-anchors estimates to nearly complete employment counts available from unemployment insurance tax records. The benchmark helps to control for sampling and modeling errors in the estimates."And the margin of error for the household data can be substantial:"...the threshold for a statistically significant change in the household survey is about 400,000..."(Both quotes from http://www.bls.gov/news.release/empsit.faq.htm ) Given the solvency event was a once in century trend event that experienced a dramtic sudden reversal, it is easy to see that a cumulative error of three or four months has occurred of about 1 million employed.The US current unemplyment rate is now about 5 1/8%. It is very difficult to refute the above logic. I cannot.

Wednesday, October 8, 2014

Ebola is a lousy and ineffective virus, as a virus goes – at
least in the human sphere. The
epidemiology math “p” factor in morbidity
and virulence is lousy and requires
massive mutation to ever make the big time in becoming a world class killer,
like HIV or ubiquitous malaria.

Retching blood in great agony, or crying tears of blood is
great drama, far more terrifying than night chills of malaria or the sarcoma of
AIDS, and makes great press. And like any
body fluid spreading disease with high levels
of morbidity – and with all the blood and gore – it’s first hit is noted
and effective, to say the least. But the
fact it does kill in such a gruesome high profile way with lots of fluids slopping around, makes it more a terrible and
deadly test of basic infrastructure and public health policy than as a effective killer disease. Most locales have no problem dealing with Ebola, it is a minor though dramtic. Obviously many African locales are failing
utterly.

But Ebola is not a major health risk for the world.

The current press and media are either deliberately doing
great harm so as to sell ad space, or they are maliciously enjoying this
gruesome tale, or they are very poor journalists and have made no effort to
define the story and get the facts. The press coverage on Ebola is close to or is criminal.

Epidemiology, the science backing the spread of a disease or
condition, is well understood and specific. The Atlanta based CDC has released a model
for Ebola at stacks.cdc.gov/view/cdc/24900 where one can download a easily used Excel spread sheet.

Inputs for
the population of the area of concern; the ground zero beginning carriers
numbers; the infectious time for the
carriers; hospital, home quarantine and
wanderers commitment rates; how
infectious or effective in transmission the disease is while in the hospital,
home quarantine, or wandering around – all these variables can be entered to
find out how many Ebola cases will occur.
Then a 40% mortality rate can be applied to calculate the deaths Ebola
can cause.

I used a very high number of 20 Ebola carriers make it to
the USA and go to 20 different cities, not knowing they have Ebola at first.
But as soon as they are thought to be at risk I have 95% hospitalized, 3% under
home quarantine, and 2% loose in the population. The 20 different locales means this happens
to a population of 200,000,000 (20 times cities of 10MM – obviously a very
dramatic number), and the transmission rate of the disease I use .001% in the
hospital, 5% while in home quarantine
and those wandering around having a 30% infection rate.

The numbers – and keep in mind this is well understood science
with little if no debate in this outcome – well a 5% confidence band which is
what I instructed the CDC model to solve to – comes out with a Ebola, as far as
the US is concerned, a non-event. No Brad Pitt World War Z.

Since this is material is easily found and can be vetted by
those more experienced than I quickly, and since the CDC has made this available
in a very easy form to understand and do “what ifs”, some disturbing
conclusions emerge.

Why isn’t
the CDC and the US public health authorities making this well known?One can conclude that they are spinning
Ebola, again from the US perspective, into a monster story into realms of
fiction – why? Why aren’t the US public health guys doing their job at a a most
critical time of public concern?Why are
they allowing this panic to emerge?

If I am wrong and the public health authorities
are making this available to the press – this CDC spread sheet was easily found
– why is the press deliberately ignoring the facts and spinning this into a
Hollywood horror sci-fi horror movie?If
the press is aware I can only see this as one of the most callous if not
criminal acts of the press that I can remember.

Or is the presssimply stupid and have been swamped by Twittter and have been reduced to
a most ineffective and unprofessional status?If they are bungling to the point of malfeasance the Ebola story – what other
stories are they also “blowing”?is this
Ebola hack coverage defining?

This presents a very grim picture of how
terrible lifestyle , infrastructure and public policy is for those stricken
African countries.If the most basic
hygiene were applied or the most basic hygiene applied at mortuary or tending
to the dead, or just if everyone would wash hands – Ebola would be as it should
be, a bizarre one off event striking like lightening some very unlucky
folks.

Ebola is piker of a disease, even in Africa it is at
best semi-pro.

What is killing Africans is not Ebola, but that a very
easily contained disease like Ebola can kill so many. It is the basic African lifestyle and
infrastructure that is the disease.
Case in point is that Nigeria, not high on many folk’s list of
successful countries, has dealt with Ebola successfully. That is a frighteningly damning for those
countries not dealing with Ebola successfully.
They must be hell on earth. At
the very least all countries need to be brought up to the relative “rich”
levels of Nigeria in terms of public health – at the very least.

Monday, September 1, 2014

Basically seeking a place to hang the following slides, both of 5 year UST Yield versus the sell 5 year UST and buy 30 year UST curve trade. But will provide a short discussion

I decided to do a scatter on this after reading the great analysis Jim Hamilton did on the US Treasury 10 year rally and how this was a "conundrum". While very comfortable with his analysis of risk premium and GDP expectations - at first I was all set to agree - I decided to pull the data. I conclude there is no conundrum but a rare powerful technical move of the curve in anticipation of a sudden Fed Funds hike, a hike that given the pressure building will certainly be well before year end 2014. To my read it is akin to how the bay will empty of sea water prior to the arrival of the tsunami.

http://econbrowser.com/archives/2014/08/bond-market-conundrum-redux

Over the long run the 5:30 curve is an equivalency to the 5 year UST yield with usually a vol ratio (5 year UST YV/32) making a .4 outright 5 y UST to every 1 5y amount in the 5:30.

However that vol ratio is now flipped and is 1.4:1 outright to 5:30.

To me this is indicative of significant if not massive pressure on the curve to realign so as to be priced for a regime shift - since the 5 year is still anchored in ZIRP, it means the longer maturities rally harshly to flatten the curve. Then after the Fed hikes, the curve will continue to flatten but the relationship of 5 y UST now normalized to the curve.

The surge in vol of the 5:30 relative to outright 5 y UST indicates to me a regime jump is about to occur, certainly well before year end. That regime shift would be a surprise rate hike that will lead to a 2 1/2% to 3% 5 year UST imminently.

Note that the small formation under the 8/30/2014 is the worst of the crisis, when it seemed calamity was to occur, from December 08 to January 2009. It is unlikely we reach such a stressed position so I suspect the 5 year (and UST yield in general) jumps suddenly to the prior regime. That is marked by the yellow arrow.

Those who have done well in the flattener to date should swap that position for puts on the 5 y UST.

For open 9/8/2014 followup:

The 5 year UST vs the UST 30s to 5s did move from the above 9/2/2014 opening. The 30s5s backed 6 basis points and 5 year UST backed 19 basis points, for a total net P/L impact, if you did the above swap, of 25 basis points or $8900 per million 5 year UST par amount. So far so good. I think there is a boundary at the data point of 8/29/2014 close.

Sunday, August 24, 2014

“Justice? - you get justice in the next world, in this world, you
have the law.”

William
Gaddis JRTo most the following clearly outlines a "dual mandate", a long running permanent foundation stone of the powers mandated
to the Federal Reserve by Congress, an ubiquitous feature of monetary policy:

“Consistent with its statutory mandate, the Committee
seeks to foster maximum employment and price stability. Currently, the
unemployment rate is elevated, and measures of underlying inflation are
somewhat low, relative to levels that the Committee judges to be consistent,
over the longer run, with its dual mandate.”

November 2010 FOMC Statement.

From then on it was posted in one way or another in every FOMC Statement:

“Consistent with its statutory mandate, the Committee
seeks to foster maximum employment and price stability. The Committee expects
that, with appropriate policy accommodation, economic activity will expand at a
moderate pace, with labor market indicators and inflation moving toward levels
the Committee judges consistent with its dual mandate.”

July 30, 2014 FOMC Statement.

But the current use of "dual mandate" is not a legacy constitutional keystone empowering the Fed but is a radically new interpretation of the Federal Reserve Act perhaps now cynically used by Yellen and company. The current use of "dual mandate" is unconstitutional and is at odds with the academic literature on monetary economics and a "ruse" so as to allow the Fed to make economic policy that they are excluded from doing so - thus its unconstitutionality. The “dual mandate” used in the Statement, the official lawful communique by the Federal Reserve, a
radical ambitious (mis)interpretation of the law so as to justify the current focus of the Board of Governors, as led by the Chair, have on employment.

This citing of “dual mandate” with "maximum employment" as used is necessary to justify the current Odyssean Fed
and the principles of “forward guidance”.
It empowers the Fed to subjectively and secretively define what is “maximum
employment” – now a slippery qualitative and complex mixture of 19 distinct
measurements of employment characteristics, the LMCI, and a radical de-emphasis on the unemployment rate
(UER-3), especially as the rate falls to levels that mocks the Fed.

The Fed's has justified their power rests on the “dual mandate”, as defined by the Fed and by the Board of Governors, specifically the Chair, deploying a English/Alvarez/Bernanke invention of the centrality of employment as the mainstay of "communicative" policy. But this use of the dual mandate is not a consensus of Federal Reserve
staff, nor with the staff at the Board of Governors.

There is deep concern within the Fed that the
emphasis on employment, now qualified by the economic intuition of Yellon, is an
incorrect interpretation of the law and is either a theoretical non sequitur or a deliberate academic falsehood, a ruse.

Empowerment for current Fed forward guidance monetary policy rests upon the constitutionality of the “dual mandate”, provided it does not cause
undue inflation, on a subjective constantly changing definition of “full employment”.

This stress on employment is not reconciled with the Federal Reserve Act original intent
nor by the amendment of 1977 and 1978.
The 1946 Employment Act does grant the President, or rather charges the
President to table policy to Congress to provide “maximum employment”, and the
1978 Act does request the Fed to coordinate with that Executive defined
policy. But it is clear if the President
does not table such policy and Congress does not insist upon the Executive to
do so, the Fed is not to intercede or fill in the vacuum with monetary policy aimed at changing employment status.

If the “dual
mandate” now offered at the end of a paragraph sites a mandate
the Fed does not have granted by Congress, wording starting with “Consistent with its statutory mandate”, is
a legal ploy by the Fed to end that paragraph with seemingly a repeat of the “statutory”
with “dual mandate” but now, unlike the language of the statue it states “maximum
employment”.

Thereby
the Fed “switching” the statutory mandate of conducting monetary policy "commensurate with potential production” with
“maximum employment” is to switch a forward view of not impeding potential production being reached, and thereby the resulting in perhaps the sweet spot of “maximum employment”, with the Fed current "extraordinary" proactive
current policy that has “maximum employment” as the only economic objective. This is not the law.

Since
this cannot have gone unnoticed by the Board of Governors, I am certain that
there has been discussion at the highest levels with the involvement of Alvarez etc, so the use of "dual mandate" is a deliberate redefinition of the law by the Fed – and is therefore unconstitutional.

The
ability to show there can be a reasonable argument in that “dual mandate” is an
incorrect read of the law, that the debate can even be had by thoughtful people
both in the Fed and outside, should cause great concern.

If in fact the argument prevails that the
wording “dual mandate” is an incorrect read, perhaps to serve a
political agenda by certain ascendant groups in Congress, will be devastating for the Fed and likely ends with Yellen’s dismissal.

That will take place if, though well-meaning in terms of public
service, the “dual mandate” does not work and then it will be easily shown it is a legal ruse justifying a radical progression of the Fed to write macroeconomic
policy for which they do not have the mandate or the constitutional power or power to do so.

What
further compounds this problem and heightens risk is that the replacement of Federal Reserve Act "production" with many facets, with just employment is an unproven and keenly debated thesis which
involves the Phillips Curve, wage stickiness and many other confusing and
unknowable economics.

Employment has
been massively disturbed by a once per century economic event, a solvency event, and it is not even known why unemployment rose as it did and why it is dropping
in the fashion it is now. The various ways of describing unemployment are also
not calibrating with “demand side” of
qualified labor showing an extremely strong if not on the edge of a bubble economy
while unqualified workers and many of the supply side metrics of labor show perhaps a
lack luster economy.

This is
not the time for the Fed Board of Governors and FOMC to
rewrite law with unproven radical theories of how monetary tools connect to real world outcomes.

Yet the
public and strangely almost all those in the financial industry are uncritically
accepting of the Fed’s radical rewrite of law.
Most have the adamant view that “dual mandate” is written on bedrock and
are derisive or dismissive when someone points this out. That they "know" the dual mandate was the intent of Congress and it has always been with us, at least since 1977.

The reality is that before the
November 2010 Statement, the dual mandate of employment and inflation was an abstract or descriptor of what the Fed
did, a shorthand even, and was never considered the statutory mandate.
“Dual mandate” was economic slang,
describing what the Fed would
monitor and consider but not the statutory
mandated objective. It was the “effect” and not the “cause”. The original clause was a different “dual” –
that of inflation and low long term interest rates. The title sentence of the
Federal Reserve Act to this date does not even mention employment but states:

“An Act To provide for the establishment of Federal reserve banks, to
furnish an elastic currency, to afford means of rediscounting commercial paper,
to establish a more effective supervision of banking in the United States, and
for other purposes.”

The Federal Reserve is not
to write economic policy but first and foremost provide a Bagehot/Kindleberger
central authority that provides lender of last resort services and maintains liquidity
through the acquisition of assets from the private sector. This is the most inspired public policy since
Hamilton created the US Treasury and national fungible debt. And of course it
is why the USA did not enter into depression in 2008. But once that courageous and wonderful duty
was implemented for the nation, the Fed – likely for a myriad of reasons –
decided they must focus solely on “for other purposes” as they interpreted in the fly.

The first Congressional act
that dealt specifically with employment, in 1946, did not even mention the Federal
Reserve but the President. There
was great concern that after the massive Keynesian stimulus of WWII remedied
the crazy tightness of FDR working in coordination with the Federal Reserve tightening, the new President Truman with his reputation of being a “Blue
Dog” and fiscally tight, was charged by Congress to deal first and foremost
with employment. It was thought that
returning soldiers returning to a peace time footing would
throw the economy into depression, once again.
Therefore it is in error to cite the 1946 act as having anything to do
with the Federal Reserve “dual mandate”.
This is the popular view error was summed in a Washington Post letter to refute
George Will taking similar lines to what I am stating here. Since the writer is Ken McLean who was a
staffer in the writing of the 1977 and 1978 amendments to the Federal Reserve
Act, it is thought to have authority and set the record straight. McLean writes:

“The 1977
legislation referred to by Mr. Will was the Federal Reserve Reform Act, which
among other things called upon the Fed to conduct monetary policy so as to
"promote effectively the goals of maximum employment, stable prices and
moderate long term interest rates." These goals are substantially
equivalent to the long-standing goals contained in the 1946 Full Employment
Act. The goals of the 1977 act were further affirmed in the Humphrey-Hawkins
Act the following year.” (WP
November 25 2010)

This is either at best in
error, or worst disingenuous as nothing that transpired or said by Congress, even to
date, supports his statement. To cite
the 1946 act is either an old man with a fogged mind or simply bunk. The 1946 act has nothing to do with the Federal
Reserve Act and the the Federal Reserve amendment of 1977 citing of the 1946 act in 1978
clearly has employment as the effect that increased production would bring
about, among other economic variables.
McLean also takes the wording of maximum employment out of context, not
mentioning the preceding language.

The key
and entire language is in Title 12 Chapter 3 Section 225 (a) which was changed
with the 1977 amendment, a change that
was 64 years in the making, with the addition of the term “maximum employment”:

“The Board of Governors of the Federal Reserve
System and the Federal Open Market Committee shall maintain long run growth of
the monetary and credit aggregates commensurate with the economy's long run
potential to increase production, so as to promote effectively the goals of
maximum employment, stable prices, and moderate long-term interest rates.”

It is important to note where employment appears in regards to or dependent on what. The statutory mandate is to “increase production”. “Maximum employment” is the intended results of “increase production” and explains why Congress is instructing the Fed to increase production. To have the Fed to assist or allow administrations policy for the country to reach potential
production is the entire mandate, and it is assumed that maximum employment will be the
end results, which by production growth the Fed "promotes" for the long run.

The
following year Humphrey-Hawkins Act elaborated further on this intent and “finding
of Congress” and clearly shows the non
policy making role of the Fed by adding
a reporting section 225 (b), which by listing what Congress wants reporting on
shows the placement of employment in this intent:

“(b) Congressional Report.The Board shall, concurrent with each
semi-annual hearing required by this section, submit a written report to the
Committee on Banking, Housing, and Urban Affairs of the Senate and the
Committee on Banking and Financial Services of the House of Representatives,
containing a discussion of the conduct of monetary policy and economic
developments and prospects for the future, taking into account past and
prospective developments in employment, unemployment, production, ,investment,
real income, productivity, exchange rates, international trade and payments,
and prices.’

Clearly employment is
only one of the several factors of “the long run potential to increase production”. There are many variables,
employment being only one of the variables.

Furthermore the 1978 Act
has a preamble a “finding” of Congress which shows the limits and the
expectations of how the Fed was to act in this system and with whom:

“and by improved coordination among the
President, the Congress, and the Board of Governors of the Federal Reserve
System.”

It is obvious that the
mandate the Fed received from Congress was to implement policy that contained
or prevented inflation in the context that would increase production. The Fed was to then report on how the monetary
policy impacted the variables that describe the whole spectrum of production.

There never was a dual
mandate of “maximum employment" and inflation granted to the Fed by
Congress. It is clear “maximum
employment” is the desired results but not the mandated objective.

The history of the Fed after
the 1978 and a consideration of the “dual mandate” use since then, also shows
that Congress has never granted the Fed the employment and inflation dual
mandate. Almost immediately after the
1978 Humphrey Hawkins Amendment, Volcker simply tossed onto the academic
rubbish heap Miller’s use of the amendment – and Miller did not focus on
employment but concentrated on economic growth via an easy Fed such that it
would result in greater employment. The
results were the agony of stagflation, which in theory was never to occur, so
the 1978 act suffered immediate discrediting and seemingly proof that the
linkage of inflation and production was not understood. So the entire academic basis for the 1978 was
tossed out the window – and to many that is still its status. Volcker commented:

“… I don’t think that we have the choice
in current circumstances — the old tradeoff analysis — of buying full
employment with a little more inflation.

We found out that doesn’t work, and we are in
an economic situation in which we can’t achieve either of those objectives
immediately. We have to work toward both of them; we have to deal with
inflation. And the Federal Reserve has particular responsibilities in that
connection. “

From
then until the mid 1990s, the Fed “dual mandate” was rarely mentioned as the
Phillips Curve and the ability of the Fed to control the employment inflation
tradeoff was a risible concept. In fact
employment was dropped from consideration and it was accepted in the sense
Congress always had placed it, as a subset of production with production
analysis framed in terms of realized and potential. The rules appear where societal goals of full
employment are not considered to be within the ability of the Fed to seek. That is why all monetary policy “rules” (ironically Yellen implicitly acknowledges
this with her modified Taylor Rule, her “balanced rule” not having employment
as an explaining factor) either have only inflation or inflation and some
metric qualifying production – usually an
output gap value - as the entire useful set of factors that the Fed
can effect. Since there is no academic literature,
at least that I can find, that applies an employment variable into a “rule”, it
shows that no one at the Fed thinks they can directly impact employment. This is another indication that not only is “maximum
employment” cited as the mandate an unconstitutional legal ruse, the use of
employment in the dual mandate is a
communicative effort, or more correctly described as propaganda. Bernanke admits as much, how the fed cannot
impact employment but is in the domain of economic policy not monetary policy in one of his last speech on November 19 2013:

“….the Federal Reserve could not adopt a numerical
inflation target as its exclusive goal. Nor would it have been appropriate for
the FOMC simply to provide a fixed objective for some measure of employment or
unemployment, in parallel with an inflation objective. In contrast to
inflation, which is determined by monetary policy in the longer run, the
maximum level of employment that can be sustained over the longer run is
determined primarily by nonmonetary factors, such as demographics, the mix of
workforce skills, labor market institutions, and advances in technology.
Moreover, as these factors evolve, the maximum employment level may change over
time. Consequently, it is beyond the power of the central bank to set a
longer-run target for employment that is immutable or independent of the
underlying structure of the economy.”

This is
amazing, to me as Bernanke is almost winking and rubbing his nose and admitting
that the use of employment by the Fed is solely to fool the folks into having
the expectations the Fed seeks – ergo “forward guidance”.

The
problem now seems to be that some in the Board of Governors group, including
Yellen have come to believe that the mandate is full employment, one of a duo, and the Fed can bring about a qualified full employment status. Or she is a most audacious
liar and is cynically leaning into the Bernanke “communicative” purpose of the
ruse – no harm no foul all for a good cause – to simply expand and maintain the
newly found power of the Federal Reserve delivered to them by the crisis.

The use
of employment in the dual mandate also didn’t appear until mid 1990s, and when
hawks attacked Greenspan who bravely made a call on
productivity that allowed him to stay in relative ease throughout the 1990s,
producing the “Great Moderation” and providing the strong capital market
setting that allowed for the rise in productivity in the first place, the dual
mandate was thrown in his face to justify the Greenspan policies. It seems
the Princeton colleague to Bernanke, Alan Blinder was the first to use this
approach, defending Greenspan from the hawks when he wasnt trying to oust
Greenspan and replace him with Alan Blinder:

“As usual, let me defend the status quo. We
have a dual objective in the Federal Reserve Act now. I think it works very
well. I think the case that it is broken and needs fixing is very thin. … There
is no existing evidence — and I can’t say this too strongly — that having such
targets leads to a superior trade-off. None at all. It is not one of those
cases in which the evidence is equivocal. There is nothing that can be cited “ FOMC Minutes Jan 31 1995 Blinder

Then, perhaps
with Blinder exiled from the Fed and the dotcom bust, employment in the dual
mandate disappears from academic and Fed lexicon until the 2008 solvency event.

And even then
the Fed was slow to discover that their main purpose in life was to honor the “dual
mandate”, not even mentioning employment and mandate in the same sentence until
the September 2010 FOMC. I find this very
strange as it certainly does not sync with those who think “of course” the Fed’s
powers rest upon the long established core empowerment of the dual mandate – it
is law!

“Measures of underlying inflation are
currently at levels somewhat below those the Committee judges most consistent,
over the long run, with its mandate to promote maximum employment and price
stability” September 2010 FOMC Statement"

But even as
late as 2010 the Fed was yet to discover their constitutional bedrock of
empowerment, the obvious long standing dual mandate of “maximum employment” and
inflation. But by September, as they
started to get some heat over the startling swelling of the Fed’s balance sheet via QE I and then the start of
QE II, they had obviously switched the statutory mandate to support increased
production with “maximum employment”. By
the November 2010 FOMC, finished form had been “discovered” and the shibboleth
of dual mandate had been created with the Fed freely rewriting the Federal
Reserve Act, despite the fact that they believed that the Fed could not
directly affect employment, that employment was a nice results but since Miller
no one at the Fed thought it had much to do, if anything, with monetary policy.
Still the November 2010 Statement was the first statement of the dual mandate
claim that has been in every statement since:

“Consistent with its statutory mandate, the Committee
seeks to foster maximum employment and price stability. Currently, the
unemployment rate is elevated, and measures of underlying inflation are
somewhat low, relative to levels that the Committee judges to be consistent,
over the longer run, with its dual mandate.” November 2010 FOMC
Statement

The belief in
a “natural rate”, a Fisher rate, is the keystone to FOMC monetary theory. The level of what the natural rate is is the
subject of great debate, but almost all policy makers and analysts in the Fed
system believe in the Friedman-Phelps natural rate thesis that the natural rate
cannot have any impact on the level of employment.

So based on
the record, a read of the relevant law and the amendments, the academic use of “dual
mandate” both inside and outside the Fed since the 1978 amendment, the
widespread belief in Freidman-Phelps, and how the “dual mandate” slipped
into the FOMC Statement and when it did so (late as November 2010) – the Fed, in truth, do not believe they have a Congressional mandated objective to reach “maximum
employment” and the use of the concept of “dual mandate” is for “communicative”
purposes or to justify the greatly expanded power base.

In short, the formal use of “dual mandate”
with maximum or full employment as one of the main objectives of the Fed, is
clearly unconstitutional and a “ruse”.
Since Miller every FOMC was loath to express their objective or mandate
in terms of unemployment or employment as it was felt that it could not be
changed via monetary policy and was not the mandated task assigned to the Fed
by Congressional law.

All that
radically – and in a very risky unconstitutional way – changed on November
3, 2010.

Those who
think the dual mandate is a given, always a keystone to Fed policy and clearly
the assigned duty of the Fed by Congress simply have not read the history of the Fed,
considered the law in even a casual manner, and are naive.

Followers

About Me

Many years of experience in being a market maker, a trader, a salesguy or portfolio manager in almost all asset classes known. Have had a high teens average career return and yet can say that I have lost more money in more asset classes than anyone I know.
My biggest curse is that not even wishing to become involved: "I see dead people.", as the kid said in the movie. I can smell a trade in the drawer or financial fraud or PL blowup miles away. Should have been with the FBI if wanted to max social utility.
Autodidact in all things math, formal education in history.